Aswath Damodaran 516
Estimating Stable Growth Inputs
! Start with the fundamentals:
- Profitability measures such as return on equity and capital, in stable growth, can be
estimated by looking at
- industry averages for these measure, in which case we assume that this firm in stable
growth will look like the average firm in the industry
- cost of equity and capital, in which case we assume that the firm will stop earning excess
returns on its projects as a result of competition.
- Leverage is a tougher call. While industry averages can be used here as well, it
depends upon how entrenched current management is and whether they are
stubborn about their policy on leverage (If they are, use current leverage; if they
are not; use industry averages)
! Use the relationship between growth and fundamentals to estimate payout and
net capital expenditures.
There is a significant subjective judgment involved with each of these estimates.
That is unavoidable.
